Sweden: Economic growth slows in Q3

The Swedish economy slowed down in the third quarter of 2016, as previously signaled by the downbeat economic tendency indicators in the three months to September. GDP expanded a meagre 0.5% on a seasonally-adjusted quarter-on-quarter basis in the third quarter of the year, down from the revised 0.6% increase of Q2 (previously reported: +0.5% qoq). The reading matched the deceleration markets had expected on a quarter-on-quarter basis. The result was caused by the disappointing performance of domestic factors, while the external sector fared relatively well.

Government consumption growth stalled, slowing from Q2’s 1.2% increase fell to a flat reading, the lowest since March 2011. Government is now cutting some expenses after last year’s record wave of refugees, which required extraordinary spending, has slowed down remarkably throughout 2016. Household consumption improved from a 0.1% drop in the second quarter to a 0.4% increase in Q3. The positive development in private consumption stems from the record-low unemployment figures recorded in the three months to September and still low price pressures. Fixed investment was stagnant in Q3, considerably down from the previous quarter’s 1.9% increase. Thus domestic demand increased only 0.2%, the weakest reading in eight quarters and below the 1.0% growth of Q2.

On the external side of the economy, exports recorded a solid improvement, swinging from Q2’s minus 0.4% to a 1.3% increase. At the same time, imports remained stable at Q2’s 0.6% growth in the third quarter of 2016, thus the external sector’s net contribution to overall economic growth improved considerably from Q2’s minus 0.4 percentage points to plus 0.3 percentage points in Q3, the largest positive impact since Q4 2015.

In annual terms, GDP growth also slowed, from 3.6% in Q2 to 2.8% in Q3. The result was below the annual growth market analysts had expected. Q3’s weak reading has now heightened the probability of an even further expansive monetary policy according to Torbjörn Isaksson, Chief Analyst at Nordea, who maintains that:

“The weaker than expected domestic demand is bad news for the Riksbank, as the bank needs a strong domestic economy for inflation to rise. The focal point is on the current and too low inflation, but today’s figures nevertheless support our view of further stimuli measures in December.”

FocusEconomics Consensus Forecast panelists expect the economy to grow 3.1% in 2016, which is unchanged from last month’s estimate. For 2017, our panel projects that the economy will slow down to 2.3%, which is also unchanged from last month’s forecast.